Bitcoin Technology Tested In Trial By 40 Big Banks

The technology behind Bitcoin is starting to make progress on Wall Street.

By December, financial technology company R3 CEV had brought together a consortium of 42 banks to create standards and protocols for using blockchain technology in financial services.

Thursday, R3 announces that it has completed a trial in which 40 of its member banks tested five different blockchains to issue, trade and redeem a fixed-income product. The company believes that this is the largest trial on blockchain technology of a real-world process in the financial markets.

The size of the trial demonstrates that even as fintech, Bitcoin and blockchain startups threaten to dismantle Wall Street’s grip on financial services, established players also intend to capitalize on technological innovation to make their products and services cheaper and faster — and could potentially do so quickly enough to ensure their future in what is likely to be a radically changed industry.

It's not the only effort by established financial institutions to exploit the efficiencies of shared ledger technology. In late December, Nasdaq's Linq product, which uses blockchain technology to manage shares in pre-IPO companies, recorded its first transaction, documenting the issuance of shares to a private investor.

“This development further supports R3's belief that close collaboration among global financial institutions and technology providers will create significant momentum behind the adoption of distributed ledger solutions across the industry,” David Rutter, R3’s chief executive said in a statement. “These technologies represent a new frontier of innovation and will dramatically improve the way the financial services industry operates, in much the same way as the advent of electronic trading decades ago delivered huge advancements in efficiency, transparency, scalability and security.”

The group experimented with five distributed ledgers, provided by Chain, Eris Industries, Ethereum,
IBM and
Intel, all of which have developed such technologies either as open source projects or for enterprise.

The banks evaluated how well each technology ran smart contracts — computer programs that execute financial transactions -- that helped issue, secondarily trade and redeem commercial paper, a type of fixed-income security corporations issue to raise short-term funds such as if they need capital to purchase inventory.

Member banks participating in this trial included
Bank of America,
Barclays, BBVA, Bank of New York Mellon, Citi, Deutsche Bank, JP Morgan, Goldman Sachs, HSBC, Morgan Stanley, State Street, Wells Fargo and others.

“Blockchain is a powerful innovation that has the potential to create profound change in the way businesses interact,” said James Wallace, IBM’s vice president of Blockchain, Global industries in a statement. “Using IBM Blockchain services, a blockchain network was deployed within minutes, allowing the developers to rapidly focus on building a sample application for trading unsecured promissory notes within hours.”

While many observers of Bitcoin and blockchain technology say that a group with so many member institutions encumbered by bureaucracy is likely to be slow-moving, R3 has rather quickly experimented with new technologies. In January, 11 of its members, which included large financial institutions such as Barclays, Credit Suisse, HSBC and Wells Fargo, simulated the exchange of value on a distributed ledger (another term for blockchain technology) without using a central third party.

“By undertaking initiatives such as this one, R3 is further accelerating the adoption of blockchain technology by demonstrating, instead of simply asserting, the commercial advantages of this emerging approach to financial services,” said Adam Ludwin, CEO of Chain, in a statement.

R3, in addition to gathering a consortium of banks that is developing blockchain standards and protocols, is working to create new software that can act as a standard communication layer that would allow different ledgers, such as Ethereum’s public blockchain with Chain’s private one, to interact with each other. The company also has a lab for its bank members to run controlled experiments on the technology, and down the line, it intends to also offer commercial applications that would, for instance, lower the costs of post-trade processing, settlement, payments and so on.